Monday, June 16, 2014

Perceptions and Macroeconomics

There’s a lot of people … no … let me change that … a real lot of people … who think the economy sucks.

As a macroeconomist, I sometimes think this is akin to a mental illness. Basically, reality is what we interpret internally, of the the external things all of us can see. A psychologist would be very comfortable interpreting an internal reality that is different from the external reality experienced by others as a mental illness.

I’m concerned about this as a macroeconomist because policy is based on our external expression (through voting) of how we see the world internally. And I don’t want to see internal distortions embodied in policies that apply to all of us.

One of the huge things that people are missing about the contemporary economy is the huge increase in consumer surplus: the value that you would pay for but that you don’t have to any more.

For example, 20 years ago, the revenues of a much larger music industry were counted in GDP. The consumer surplus that people got from listening to music was not. Today, there’s a component of GDP based on the revenues of the music industry that’s much smaller than it used to be. And yet everyone knows we have more and better music, in more places, than ever before: in short, our unmeasured consumer surplus has gone through the roof.

But consumer surplus is hard to observe, and easy for the pessimistic to avoid or downplay. So every once in a while it’s important to point it out.

Consider this article from the New Yorker about one of the hot new fads in services based on smartphone apps: laundry services that pick up and deliver. It’s entitled “Let’s, Like, Demolish Laundry'”.

Here’s the thing: the entrepreneurs who are featured in the article graduate from business school in 2005 and moved to Buenos Aires to be entrepreneurial.

The question that should pop into your head is: WTF?

Let’s spell this out. They graduated from a Big Ten school (Indiana), with a particularly good business school (the Kelley), in the midst of an expansion that (although not popularly noted) turned out to be the 5th longest on record. They then moved to Buenos Aires, capital of the country that is every macroeconomists answer to how you can screw up your country’s economy.

WTF? How goofy does your internal view of the world nearby have to be to think that’s a good idea?

They were frustrated by what they found:

… For kids in their early 20s, they had done impressively little screwing around. Dulanto, a Florida State graduate, had opened a juice bar, which is where he met Metzner and Nadler, friends from Indiana University who were opening a place called California Burrito next door. Two years later, Dulanto had opened a second juice bar, and California Burrito was a chain of 14.

…

At the time, Argentina’s wet noodle of an economy was foundering. Every day, California Burrito had to readjust prices to keep up with inflation. The conveniences his friends at home took for granted were a far-off dream. “iPhones were like $2,000. We were paying ourselves like $1,200 a month. And I realized that I was missing out on the great luxuries of the American lifestyle.”

N.B. To macroeconomists, Argentina’s economy has been floundering for about 90 years.

Here’s what they found when they moved back:

But these accomplishments seemed meager when the friends returned to visit their home country. Things were very different from how they’d left them, and, like time travelers, they regarded the changes with awe. “Everyone had a Prius and everyone had an iPhone and everyone had Direct TV, and I was just like, Whoa,” Metzner says one afternoon this spring, sitting in the Washio break room, a sunny space in Santa Monica with an array of snacks and a fridge full of beer. “And I’m not, like, very materialistic at all,” he continues. “Like, I’m not a person who can’t live without my iPhone. But I’m thinking to myself, like, Wow, there’s a lot of life I’m sacrificing …

I put it to you that what they sacrificed was almost all consumer surplus. It is a huge social and political problem for America (and other countries) that we’re not getting this point.